Yahoo Finance Harrow Health, Inc. (NASDAQ:HROW) Q3 2023 Earnings Call Transcript
Harrow Health, Inc. (NASDAQ:HROW) Q3 2023 Earnings Call Transcript November 13, 2023
Harrow Health, Inc. misses on earnings expectations. Reported EPS is $-0.13 EPS, expectations were $0.03.
Operator: Good afternoon, and welcome to Harrow's Third Quarter 2023 Earnings Conference Call. My name is Betsy, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to Jamie Webb, Director of Communications and Investor Relations for Harrow.
Jamie Webb: Thank you, operator. Good afternoon, and welcome to Harrow's third quarter 2023 earnings conference call. Before we begin today, let me remind you that the company's remarks may include forward-looking statements within the meaning of Federal Securities Laws. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Harrow's control, including risks and uncertainties described from time to time in its SEC filings, such as the risks and uncertainties related to the company's ability to make commercially available its FDA-approved products and compounded formulations and technologies, and FDA approval of certain drug candidates in a timely manner or at all. For a list and description of those risks and uncertainties, please see the Risk Factors section of the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.
Harrow's results may differ materially from those projected. Harrow disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of today. Additionally, Harrow will refer to non-GAAP financial metrics specifically adjusted EBITDA and/or adjusted earnings as well as core results such as core gross margin, core net income and core diluted net income per share. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's earnings release and letter to stockholders, both of which are available on the website.
By now, you should have received a copy of the earnings press release. If you have not received a copy please go to the Investor Relations page of the company's website www.harrow.com. Joining me on today's call are Harrow's Chief Executive Officer, Mark L. Baum, and Harrow's Chief Financial Officer, Andrew Boll. With that, I'd like to turn the call over to Mark to go over some prepared remarks prior to the question-and-answer session. Mark?
Mark Baum: Thanks, Jamie, and thanks to everyone for joining us on today's call. Before I begin my prepared remarks, I want to take a minute to encourage you to review our third quarter 2023 earnings release, corporate presentation and letter to stockholders, all of which have been posted to the Investor Relations section of our website, www.harrow.com. Let's jump into it. As you may have seen, we produced record revenues and improved our adjusted gross margins meaningfully. However, this past quarter showed that our ability to create value far exceeds what we actually delivered. So let me be clear, we could have done better. As I have said before, though, we knew that our growth trajectory would not be a linear path upward.
It never has been over the past 10 years. We knew that some programs would overperform and some would underperform. Today, we find ourselves a few months behind our internal development timelines for some of our programs. As we continue, though, to correct course and move our business forward, the reality for Harrow's stockholders is simple. We are well funded. We don't need to access the public equity or debt markets. We're making money, we're paying our bills, we're servicing our creditors and we're on track to produce another record year of growth and profitability. That only isn't not bad, it's a place that most companies would like to be. I am proud of what we achieved this past quarter, including record revenues that represented a 50% year-over-year growth rate as well as a 600 basis point improvement in our core gross margins.
That 50% revenue growth was fueled by our strategic decision to expand into branded pharmaceutical products, and it serves as a solid testimonial and validation of that decision. Without reservation, we could not have produced that level of year-over-year growth with compounded products alone. I'm also pleased with our progress on our IHEEZO launch, which has been tracking ahead of our internal forecast since its May launch. A proof point is the graph we included in our third quarter letter to stockholders, which shows the significant ramp-up in customer unit demand for IHEEZO beginning in September and continuing to date. This ramp in customer demand resulted from boots on the ground learnings and strategic tweaks that yielded immediate positive results and a notable increase in IHEEZO units and revenues for September, surpassing our internal targets for 2023.
We are now seeing sizable orders and reorders from high-volume users and many new accounts, both large and small, who are enjoying the many benefits of IHEEZO, and we remain bullish about what the balance of this year will bring as well as 2024 for IHEEZO. On the other hand, there is no denying that to date, 2023 has presented new challenges. One example is lower-than-expected Q3 revenues from the Fab Five products and our compounded products. Even though we completed the transfer of 4 of the 5 Fab Five products that we acquired earlier this year, namely MAXIDEX, ILEVRO, NEVANAC and VIGAMOX, we were delayed in beginning marketing and sales detailing efforts. Those efforts though have begun, and we are seeing positive data from our awareness campaign, reminding prescribers of the availability of these products and the strong reimbursement support from third-party payers.
Once again, I touched on this in our letter to stockholders. We continue to believe in the high utility of these products and their importance to our branded portfolio for not only our customer base but also for Harrow's stockholders, because we believe they will provide a reliable stream of income for many years to come. Another Q3 challenge was our compounding business, which underperformed as we invested in improving efficiencies and compliance related to manufacturing, quality systems, the makeup of our sales team and our analytical testing capabilities, as well as our customer care infrastructure. We have had to invest in efficiency and compliance in the past, and importantly, we have a 100% success record of making these investments and returning the business to historical growth levels, and I am 100% confident that this will happen again.
Investing in the required systems, processes and protocols to reliably serve a national market requires adherence to a standard and a level of complexity that we comply with, but which few competitors can achieve. I'd also like to update you on the fifth product in the Fab Five, that's TRIESENCE, which I view as the diamond of this group. We had reported last quarter that demo batches had been completed and that we were awaiting results from the first of 3 Process Performance Qualification batches, those are PPQ batches for short. While we were not naive about the fact that TRIESENCE is a tricky product to manufacture, which contributes to its out-of-stock status for most of the last 5 years, we were nevertheless disappointed that our first PPQ batch did not meet all specifications.
But this is not the end of the story, and frankly, this was not entirely unexpected. That said, we are working diligently with our contract manufacturer, and we are still committed to having TRIESENCE available next year. We are also making excellent progress on the transfer of the TRIESENCE NDA, or New Drug Application, and we expect to have that completed soon, which will allow us to reasonably adjust the TRIESENCE pricing for the first time in more than 12 years, thus keeping it in stock and available for eye care professionals and their patients who are awaiting its return. Regarding TRIESENCE market availability, frankly, in our view, it is not a matter of if but when, and we think that win will be next year. We continue to believe that Harrow largest future annual market opportunity is VEVYE, the recently FDA-approved patented semi-fluorinated alkane or SFA that contains 0.1% cyclosporine.
We're going to be launching it in a few weeks. VEVYE is a water-free product. It's a topical medication, and once again, it's FDA approved to treat both the signs and symptoms of dry eye disease. We believe eye care professionals have long awaited a product like VEVYE, a dry eye disease product that can deliver effective, fast and sustained clinical results for patients without the negative adverse event profiles associated with many of the current pharmaceutical choices. And preparing for the upcoming launch of VEVYE, it has become evident that most ophthalmologists and optometrists believes strongly in the clinical power of cyclosporin as a therapeutic agent. This should not be surprising, given the tens of millions of U.S. patients who have been prescribed cyclosporin during the past 20 years.
However, VEVYE is different from the currently available cyclosporine-based products, not only because of the comfort and the many benefits of its patented delivery vehicle, only the second water-free product in the U.S. market, but also because it offers the highest available concentration of cyclosporin. This puts VEVYE in a class of its own, and I really can't wait to get VEVYE into the hands of the ophthalmic community and their patients, and that day is fast approaching. Before opening the call for questions, I wanted to discuss our financial guidance and our expectations for the remainder of 2023 and 2024. Many of you know, but we have never been big fans of giving public revenue or profitability guidance. But as our partners in this journey, we believe you need a reasonable level of visibility into what we expect to achieve next year, at least as a base case.
Therefore, we're updating our guidance for the remainder of 2023 and giving you some direction for what we expect in 2024. Because the progress of our business is about 60 days behind, we're adjusting our 2023 revenue guidance to $129 million to $136 million. If we continue to be successful in the execution of a few open 2023 objectives, including IHEEZO sales growing outside the bounds we had anticipated at this stage of the launch as well as the timing of future milestones unfolding in our favor, we could land toward the higher end of the range. Regardless, our business remains solidly in a growth mode for the balance of our 5-year planning cycle, which includes not only the remainder of this year but 2024, and it will continue through 2027.
We are also adjusting our previously issued 2023 adjusted EBITDA guidance to a range of $36 million to $41 million, primarily because of lower revenue estimates coupled with increased costs associated with recent acquisitions, needed investments in the preparation for the launch of VEVYE and one-time integration costs associated with the Santen acquisition. As for 2024, excluding any contribution from TRIESENCE, we expect our 2024 revenues to be north of $180 million. The magnitude of revenue growth beyond $180 million will depend on many factors, including when we restore TRIESENCE inventory, the acceleration of IHEEZO sales and how the VEVYE launch goes. Beginning in the first quarter of 2024, we expect moderate revenue growth from our recently acquired FDA-approved products, including the Fab Five and the recovery of our compounding business to historical growth levels.
From a cost structure perspective, we expect our operating costs to increase incrementally as we scale our business to grow revenues and invest in the VEVYE launch. We expect to continue investing in our commercial infrastructure while maintaining our leverage ratio. That's debt over adjusted EBITDA and that should be below 5x. We expect to close 2024 with a strong balance sheet, with cash increasing significantly during the period. We remain confident in meeting our obligations to Harrow's creditors, and we do not expect to dilute our stockholders unless we find a transformative transaction. But candidly, given where our stock price is, we are less inclined to use equity as a currency. We are happy to answer your questions. I will pause to have our operator poll for questions.
Operator?
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